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tv   Options Action  CNBC  September 16, 2012 6:00am-6:30am EDT

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now you stay safe and honest! bye-bye. this is "options action." tonight face saved. how would you like to get your money back in facebook? don't ask this guy. >> the performance of the stock has been disappointing. we'll show you how to get your money back, too. plus five is alive. the release of iphone 5 has sent apple to another all-time high. if you miss the rally, relax. because khouw and carter are teaming up to double your money by the end of the year. why were options traders digging dole foods? scott nations serves up the answer. the action begins now. live from the nasdaq i'm melissa lee.
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these are the traders here. we will get to the trades in a second. it is official. the fed fix is in. stocks hitting five year highs today in hopes of more stimulus. the goal tonight is clear, give you names and strategies to profit. from the free money fed. let's get into money and start with our resident. bear. dan. do you finally say uncle? >> pretty much. the fix is in here. we have the election coming up. in a lot of ways we have to consolidate some of the price action we have seen. although the feds easing was pretty well hen telegraphed, we are starting to see the financials the way they participated. we are seeing rotation out of defensive names. the rally is broadening out a little bit. it probably has to consolidate. we are going to need to see consolidation at the multi year highs. >> what are you seeing in terms of put and call activity going into and post the fed? >> we saw a lot of people trading heavily in the financials. so all of the big money center banks saw a lot of activity.
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the xlf saw a lot of activity. right afterwards what was interesting yesterday we talked about it briefly was the fact that we saw people buying calls on tvt and puts on tlt which is a bet against long term u.s. treasury bonds. sure enough, those bets were -- those were very profitable trades today. i think what we have here is we are getting free money but not getting free wealth. you can't create wealth by just printing money this way. it's going to support passive financial assets in the near term, but ultimately you have to worry about how you discount. >> meaning what? >> stocks and bonds, anything that sits on a bank's balance sheet. that is what is creating this huge yield. what ends up happening, ultimately if we get to a higher rate environment what is going to happen is you discount stocks differently. that's going to hurt their prices. there is still risks there. >> last week we talked about the volume in the financials and option volume last week.
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in the xlf, it was huge. i do think there are a lot of funds, a lot of hedge funds that got healthy this week. you would hope so because they've been trailing horribly. almost everything went up today except for technology. i think it is interesting that the vix was up today. it was up on the week which was surprising given that everybody had been waiting for the news this week and the fed meeting and thought once this was out of the way the election was the only thing -- >> one of the reasons it was up was because the relationship between the prices for index options and single stock options had gotten cheap on the index side. the lowest level since we saw precrisis. a little bit of a pop shouldn't surprise us. >> the vix popped but the futures curve got nailed this week. we did have global events out there, even with that the future is looking out. just telling you that people are not seeing a lot. >> i think it is interesting
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that the sickest banks did the best this week. that's probably about what you would expect. they are the ones with the mortgage backed securities on their balance sheet. one thing that is interesting, jp morgan is back to the prewhale level. they're all the way back. >> melissa said you don't need to buy puts if bernanke is giving you one for free. he basically delivered that. >> i rarely do that. good for me. let's trail down in terms of financials here. wells fargo, a lot of people are speculating that the banks that can lend will benefit the most from the free money. and perhaps the push to get mortgages and to lend money. mike, what do you see here for wells fargo? >> i think basically as i was commenting earlier all of the money center banks are basically being void by the fed action that we are seeing. they have been at relatively depressed levels. if you want data it is a great place to get it much like some of the other commodity stocks. >> last week we were highlighting big gains we have seen in banks.
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at this point, what do you see for wells fargo? you're putting the trade on. >> this is a great point. goldman sachs went from 106 to 121. it was a beta chase in a lot of ways. that sort of money is not attracted to wells fargo. why i'm looking at wells, i'm looking out to january. what caught my eye is that here's a stock that has been amazingly stable throughout all the turmoil in the last year and a half in the financial markets. these guys are levered to mortgages. when you look at that chart right there, it is a massive resistance level. i wanted to look out a couple of months and look for a relatively cheap way to get long exposure to wells fargo. >> dan is doing a risk reversal. the strategy is tricky so it is good to open the play book. and see how it works. this is a bullish strategy where dan buys one call. and then to reduce at that cost sells a put against it. the goal here, well, in order to make money you want the stock to trade above by more than the cost of the trade. but there's a tradeoff. because you are short that put
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you may have to buy that stock at the put strike price. you need to be ready to buy that stock and you also need the cash ready in your account. with that said, why don't you walk us through. >> you can always buy a call generally pretty cheap in wells fargo. i wanted to set up a structure where i had this very cheap premium exposure to wells fargo. over the next few months. what i did was, when the stock was about 36.10 i sold the january 13 put to buy the 38 call for 90 cents. that cost me ten cents. basically, if the stock is between 33 and 38 on january expiration i lose the 10 cents in premium. it's a pretty wide range there. if the stock is above 38.10 i make money, basically $2 away from where the stock closed. here's the big point. this thing is going to move like a synthetic lawn. as the stock goes lower you are going to feel losses.
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as it goes higher you will feel gains. really, those break evens on expiration are important. but you are likely to trade out of this before that. >> you are betting with the fed. the banks issue $1.25 billion worth of cmbs over the past week, which is obviously great news for the banks doing these deals. all of the real estate names are boost. the assets on the bank's balance sheets get boosted by this action. that is the trade you are making here. you are trying to run along with that. of course, by doing a risk reversal you are separating yourself a little bit from the boost that happened over the course of the last couple of days. that's really the critical thing. you put the risk reversal on. even if it does go against you it doesn't really. until it gets back to where it was previous. >> the one thing i would be afraid of is we're going to the time of the fiscal cliff. i would think the financials would really feel it greatly because of the huge climb they have had so far. >> that is absolutely possible. and that is one reason that when the market has a run like this
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i'm generally thought a fan of selling puts. i would do a risk reversal on a great name. the thing is, wells fargo is a great name in this space. dan talks about how this works, the distance to the strikes. this is one of the reasons we love risk reversals. you are only two blocks to the call strike but over $3 to the put strike. that is skew at work. that is the reason that risk reversals work. >> scott makes a good point. i'm generally not a fan at put highs but i will be shorting banks that have gone pair boll i can. i like this long exposure. >> let's wrap this up. want to buy wells fargo it will cost you about $38 a share. dan's risk reversal costs a dime and you might have to buy it for $33 a share. that is a 13ers discount. word to the wise. since you are short the put you must be willing to buy the stock and that will tie up margins. these are key points. let's move on here. if today's action is any
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indication the iphone 5 is set to be a huge hit, preorders selling out in less than one hour. the frenzy can be signaling more good news for apple. cnbc's jon fortt loved "options action" so much last week that he decided to visit again. hey john. >> hey melissa, that's right. >> there is some good news out of apple today though i think some people are overstating it. as you said apple had to push out the ship date for the iphone 5 from one week to two much more quickly than it happened a year ago with the 4 s. it took them almost all day. this time it happened within about an hour. but you got to keep in mind that this time wal-mart is taking preorders and they are launching this phone in nine countries a week from now instead of just seven. you have to question how has apple allocated the units? are they really putting up a lot more units for preorder than a year ago?
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this might have do with how much they're allocating the units with how they're moving it out. you want to watch on monday. in the morning i believe possibly around 8:30 your time apple could put out a statement saying exactly how many they sold. in the first 24 hours. we could see statements from carriers giving a sense of how quickly they sold iphone 5s in this first day and as the week wears on we will start to see lines outside apple stores. again, we need to be careful how much we read into that. there's been all this pent up demand. we knew this phone was coming. some of this is sales that they might have had a quarter ago if people had known what to expect. >> we are iphonetastic all week. what is the word on the ipad mini? we asked that you last week? are you hearing that chatter still? are we going to get an event in october or early november for the holidays? >> i haven't heard different chatter on that. still someone who has a sense of these things told me there will be multiple product launches before the end of the year. this was just one.
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i expect to see something else probably again next month as i said before. >> john, thanks so much for your report. have a great weekend. more good news from apple. amazing how that happens. here is more good news. our next guest says apple is going to $800 by the end of the year. let's call to the charts with the man who many consider to be tim cook's muse. who knew? carter braxton worth of oppenheim. >> i like to look at is apple extended? that is measured not by percentage but by trajectory. here is a year and a half of trading. these are not lines i made up. they're well-defined 45 degree angles. when you get to the bottom of a range or the top of the range you respond. importantly, you can see apple is nowhere near the top of the channel it has been in. second chart and last chart more detailed. here's what keeps healthy by my work. if apple had done exactly this 360 like this, watch my pen, and gotten to the high like that it would be in trouble but it didn't. it did this.
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it sold off 20% in the april and may period when markets were selling off. twice that of the s&p. that expunged a lot of people, took out a lot of people and made people nervous. that is what keeps it healthy. the trajectory, it had a nice pause. the pause that refreshes. it's not extended and i think we are heading higher as much as 800. >> thanks for that, carter. technicals look good. fundamentally it looks good, too. it's cheaper than a lot of stocks in the s&p 500 at this point. >> how cheap a stock is a function of how much it is trading times the cash that they generate and the earnings and how fast they are growing. this is a company that seems to demonstrate the extraordinary ability to grow at extraordinary rates. with extraordinary margins. we are talking double digit growth rates and very fat margins. 40% plus. that is extraordinary. if this company was worth $1 billion and we were talking about it there wouldn't be much of a debate about the valuation.
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the real issue isn't whether or not the company is fundamentally strong. the scale has gotten so big. we are talking about a $700 billion market cap we are talking going to $800 billion. if this was a smaller business, you might say it could be trading at a,000. there are 7 billion people on the planet. how much is it worth? you can't argue with perpetual success. >> you are bullish and you are buying a call spread tonight. this is a bullish strategy in which you buy one call. a hire strike call to reduce the cost. how do you make money? you want the stock to go to the high strike. that is where you make the most money. that's where your profits are capped. mike, why don't you lay out the trade for us. >> i didn't want to lay out a great deal of premium. the market is relatively low volatility. i have expressed concern about the scale of the business. i'm not interested in running out and purchasing the stock. i was looking at purchasing in the money call spread.
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specifically, i'm looking to purchase the jan 675 calls and trading around 53 bucks and selling the calls. that is a net debit of about 20 bucks. the stock was trading around 693. just about the middle of that. the way to think about this is you are spending $20. it's worth almost $20 and it could be worth as much as 40. an opportunity to double it. the real critical thing is it is not going to decay that much because the amount of premium is outside of the moneyness of these options is about the same for the end of money option and out of money one and i'm risking 20 bucks rather than spending $700 for a stock. >> i have a news flash for everybody out there. dan is no longer the diehard apple bull. he recently bought a galaxy, a samsung galaxy 3s. the newest on the market. dan, give us your interpretation of where apple is going to go. i'm a bit more skeptical. when i think about this, they introduced a great four inch ipod touch and the ipad 2 at
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$400. they have the new ipad at $500. we have the ipad mini supposedly coming out, where is that thing going to fit and how does it not cannibalize the other products. including the iphone. to me, i'm a bit more curious about they have to actually not only compete with samsung and all these other guys, they're competing their own products. they have fabulous margins. i think the tablet space will be a race to the bottom as far as pricing. i think they won't maintain the margins. they are expected 20% growth next year and the year after could be less. at one point with the law of large numbers, what do you -- >> so you don't like mike's trade? >> i don't like the risk/reward of his trade. if you want long reward with apple, i would be more speculative and buy further out of the money. >> stocks versus options is on the new iphone. just kidding. you can only get it here. 100 shares of apple will set you back almost $70,000.
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that means most of us are mott going to buy 100 shares. mike's in the money call spread can double your money by the end of the year and cost $2,000. not bad. our thanks as always to carter braxton worth of oppenheimeoppe. got a question send us an e-mail. we'll answer it in our one-on-one web action right after the show on our website. "options action" we post blog updates and trade updates, as well. here is what is next. talk about a facelift. not that kind of facelift. we are talking about facebook stock having its best week since going public. dan nathan called a rally and did something few have done, made money in facebook. how does he plan to make more? find out when "options action" returns. time for pump up the volume. the names that are heating up options traders sizzle index this week. did you get enough fruits and veggies today? if not these guys can help.
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they're the biggest fruit and vegetable producer in the world. this week the stock looked peachy with the news that they are selling packaged foods. options traders grabbed at the low hanging fruit betting the stock is ripe for a major move higher. who is it? the answer when "options action" returns. like a high-speed train.
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and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account. . >> where were options traders pumping up the volume.
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dole was 38 times the average daily volume. welcome back to "options action." time for the upside call. we take a look back on winning trades. a couple weeks back when facebook was in a free fall dan made a bullish trade on the social giant. he has made a lot of money and did something few have, saved face. on "options action" risk less so you can make more. that is what dan did. with husband billish -- his bullish bet on facebook. dan started to like facebook shares. >> i don't want to pile on a negative sentiment. >> buying 100 shares cost almost $2,000. to spend less, dan bought the strike call for $1.05. to make money, he he needed the facebook stock to rise above by january expiration. by 23.05. spending $1.05 just to get long the social network? >> what's wrong with you?
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what's wrong with you? hey, hey, no need to get worked up. we can do this for less. >> one of the november 22 calls. >> i like that. >> so to spend less dan sold the november 22 strike call for 60 cents and created his call calendar. he did something even better. he made making money easier and here is how. between the $1.05 he spent buying one call and the 60 cents he collected selling the other shorter dated call, he cut his cost by more than half or just 45 cents. >> hang on. just checking your math on that. yes. i got the same thing. >> keep the pencil handy because it gets better because the call that dan sold will decrease in value faster than the longer dated call that he bought letting dan do something that not even zuck can accomplish, turning time to money. yeah! >> but there is a tradeoff. in order to make the most money dan needs the facebook stock to stay below the shorter dated
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call that he sold by the first expiration above the stock by the total cost of the trade by the second expiration or by august expiration. since the time of the trade, facebook shares have risen 19%. now "options action" biggest fans are blowing up our facebook page and are liking it like madmen because they want to know the same thing. what will dan do now? >> before we answer that let's see how much money was made. had you bought facebook stock at the time of the trade would have made 14%. not bad. but dan's call calendar cost 45 cents and can be sold today for 55 cents. that is a return of 20%. you are probably thinking why not more money? well, here's the answer. dan might have gotten the trade a little too right. you see the increase in the value of the call that he short has offset the increase in the value of the call that he's
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long. if facebook can settle in and close just below 22 bucks, dan could make a lot more money. what does he do with the call? let's find out. >> you were too kind with rushes returns on that thing. >> to be honest i wish i would have bought the stock. the calendars set up beautifully at the time and it does continue to set up well. remember we have lock up expiration. the stock had a sentiment rally off o of what looked like never ending low. and so if it settles in here we will be in good shape. >> we have the final word up next.
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you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account. do try this at home. apparently dogs hate wearing shoes and people love to watch them suffer. there is a new craze on the internet. it involves people putting shoes on their bulldogs and sandals on their spaniels. the dogs are driven barking mad by the moccasins but all in the name of good harmless fun. that's the edition of optional viewing. time for the final call. scott nations? >> watch out for the expiration. >> dan >> wells fargo riskies. >>. >> mike? >> >> end of money calls. >> our time has expired.
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